independent

Sunday 20 April 2014

Paul Sommerville: Helicopter Ben's flight of fancy

Fed chairman Ben Bernanke, our 'new saviour', surpasses Alan Greenspan as the most reckless central banker ever

Ben Bernanke

Alan Greenspan really is a funny guy. The former chairman of the US Federal Reserve has just released a book entitled The Map and the Territory, which seeks to tackle the subject of, wait for it... economic forecasting.

Wow. As Fed chairman until 2006, practically the eve of the crisis, Greenspan never saw the storm on the horizon. Omens were plentiful: the house price bubble; the gross inadequacy of banking capital; the systemic risks of money-market funds; the explosive dangers of complex derivatives; the rise of a poorly regulated shadow banking system; the transparent pandering of the bond-rating companies; the collapse in mortgage-lending standards and the massive overleveraging of US consumers.

He missed it all.

And not only did he miss it but he was the chief instigator – stoking and inflating the gigantic bubble.

At the time, he was lauded and hailed as the "best central banker "of all time. The financial markets loved him. Now he is seen differently.

I remember writing at the time that Greenspan would go down as the most reckless central banker in history. This was treated as heresy then – but now I must admit I was wrong. I believe Ben Bernanke – our new "saviour of the world economy" – will surpass him

Like Greenspan, Bernanke's main plan is to inflate asset prices. It is dressed up in all sorts of complicated jargon to persuade the general population that he actually knows what he is doing but it is essentially this: the more the stock market and other financial assets go up, the better people feel and thus spend and create jobs.

There is one slight problem with the plan. His transmission mechanism. He has picked his good friends in the banking system and financial markets to carry out his strategy. Hoping if he hands his old banker chums large amounts of newly printed dollars, after they have taken their cut, some will surely trickle down to the man on the street.

He could not be more wrong. It really is incomprehensible that the same bozos who raped and pillaged the system the first time are back in the driving seats cheered on by gullible politicians and Central bankers.

Last week, the USA non-farm payrolls for September were released (delayed because of the shutdown) showing the USA created 148,000 new jobs, worse than expected. Over the prior 12 months, employment growth averaged 185,000 per month. A shockingly paltry return at this stage of the recovery and after five years of various methods of quantitative easing.

Indeed, despite the 70 per cent increase in the stock market since 2010, the US economy is now growing at roughly half the pace it was back then, while the middle class has seen six million people migrate away from the labour force and into food stamps.

Bernanke is succeeding in one thing – he is stimulating the "wealth effect" of the richest 1 per cent of the population while stealing from everyone else. The main effect is to make the superwealthy super wealthier.

It is clear that monetary inflation doesn't flow equally into all sectors of the economy; in the current conditions, it has boosted the wealth and incomes of the most affluent people. Clearly, it has never occurred to Bernanke that Fed policies favour only large asset holders, create bubbles – and, most importantly, distort the price of risk.

The world's three most powerful central banks are not spurring the economy forward. So far, the recovery has failed to materialise, despite record-breaking stimulus. More importantly, the financial system depends so heavily on debt financing that even minor dips in credit activity will create major tremors in economic activity.

This is why the stock markets took the dismal Jobs report so well, pushing the S+P 500 to another all-time high. Traders are sure that Bernanke logic will be with QE failing for five years, there is nothing that a little more QE can't fix. At the very least, the Fed will not be able to taper the $85bn it currently pumps into the system every month.

Similarly, the financial elite deem the massive youth unemployment across Europe as a necessary price to pay while the banking sector repairs itself. Indeed, bankers use it as a bargaining chip, suggesting a seductively plausible argument that an easier monetary policy for banks will alleviate the problem.

It will not. Now nearly every segment of the investment community rides comfortably atop the bullish bandwagon that recovery is on the way. Happy that Helicopter Ben (so called because he suggested he would drop money out of helicopters if necessary to stimulate the economy) has got their back covered.

But one thing investors should remember is that it's the bond market and not Ben Bernanke that is ultimately in charge of interest rates – and they are a fickle bunch.

They have gorged on one- way bets in the sovereign bond market, realising full well that the gullible politicians will take on any debts (on behalf of their taxpayers) making themselves rich in the process.

But when finally the tide turns and they run for the exits, Bernanke's Ponzi scheme will be exposed and he is sure to go from hero to villain.

Paul Sommerville is CEO at Sommerville Advisory Markets

Sunday Independent

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